Blockchain in Shipping - The Hope, The Hype, and The Future Ahead

27 Nov 2018

With the success of cryptocurrency startups such as Bitcoin and Ethereum, Blockchain is at the peak of hype cycle. There is hardly any business vertical that remains unaffected by this phenomenon. Grand promises are being made by some whereas people who are easily attracted by buzzwords are gravitating to it, and assuming every possibility of change enabled by Blockchain. If there is one other buzzword that can match the hype of Blockchain it is Artificial Intelligence. There are millions of dollars being pumped into many new Blockchain startups in Silicon Valley and around the world. So, it’s not uncommon that I receive a question about Blockchain in Shipping once a week.

So, before we examine what Blockchain can do in Shipping let’s first understand what it is and what are the possibilities.

Blockchain: How does it work and what are the possibilities?

A blockchain is an electronic ledger - a list of transaction. The transactions can be of any kind and can represent virtually anything. They can be actual money changing hands, as it happens in blockchain underlying crypto currencies, or they could be exchanges of digital or physical assets such as stocks and bonds or ships and cargo. They could include smart contracts that are computerized instruction to do something (i.e. buy or sell stocks, or automatics ownership change of cargo) when something else is true (the price of stock drops below 100 or, when ship unloads the cargo at destination)
What makes a blockchain a radically different kind of ledger is that instead of being managed by a centralized institution such as a government agency, stock exchange or bank, it is stored in multiple copies on multiple independently owned computers around the world in a decentralized network. Any of the computers on the network can make the “change” but it needs to follow certain rules, and other computers on the network must concur with the “change”. This is dictated by “consensus protocol” - as the name suggests, a mathematical algorithm that requires majority of computers on the network to agree with the “change”.

Promise of Blockchain:

In any economic system, we need trust between two parties in order for a transaction to take place. In olden times, it happened in a face-to-face transaction and by brute force of local authority. In modern civilized culture we created central banks and government authorities that everyone can trust, and thereby, reduced friction for a commercial transaction to take place. However, having all these centralized institutions (i.e. Banks, government agencies) and their rules and regulations cost money that gets passed down to consumers. Think of all the accountants whose cubicles fill the office towers around the world. Their jobs, reconciling their company's ledgers with those of its business counterparts, exist because neither party trusts the others’ records until they verify it themselves. It is a time-consuming, expensive and yet necessary process.
The real promise of Blockchain is that it could drastically reduce the cost of trust by means of a radical, decentralized approach to bookkeeping - by extension, create a new way to structure economic organizations.

To make it relevant for Shipping with an example, blockchain could be set up to establish the chain of custody in a container shipment. In this scenario, the ownership of the freight would be digitally transferred once a set of conditions has been met (such as delivery from origin port to destination port) with a specific action (such as confirmation that the container has been unloaded from the vessel) triggering the change of ownership and payment between parties.
All of that would happen electronically, eliminating paper-based documentation and errors from multiple parties entering the same data into different databases. But it also would create a scenario in which the trust in the data is verified by the mechanism of the system itself, not by individual parties.

Public Vs Private Blockchain

A private or “permissioned” blockchain: A blockchain structure that requires participants to obtain permission before reading or writing to the chain. Data or transaction in private blockchain is verified by a limited number of “permissioned” parties.

A public or “permissionless” blockchain: A blockchain structure that doesn’t require participants to obtain permission before reading or writing to the chain. Bitcoin operates on a public blockchain. Data or transaction in public blockchain is verified by a majority of the participants.

Blockchain in Shipping

Given the grand promise, it’s only natural that people are asking how the shipping industry can benefit from this groundbreaking technology.

The grand vision of blockchain is a distributed ledger that allows multiple parties to rely on the accuracy of a single transaction or action. To understand the underlying structure of blockchain, imagine a string of those transactions and actions that build on each other cryptographically.

Currently, most of the shipping transactions involve a big number of papers, such as sales contracts, charter party agreements, commercial invoice, bills of lading, proof of insurance, certificate of origin, destination control statement, letters of credit and others related with the vessel and the cargo. All these documents must pass through a long chain of parties for transaction to take place. Blockchain could turn the whole processes into a paperless nirvana by which all the related parties in each transaction (i.e. sellers/buyers of cargo, ship owner, charterer, banks, agents, customs, port authorities etc.) with the use of public and private keys could come in contact with each other, perform physical transactions, meet their contractual obligations, give and accept instructions and securely exchange payments.

However, such promises of Blockchain will come to fruition only when the industry joins one big blockchain. So far, the answer has been an emphatic - No. As opposed to Bitcoin running in permissionless blockchain (where anyone can join the network and see transactions), the very nature of Supply chain is permissioned; you want to grant permission. You get to decide who has the access to view your transaction. Hence the reluctance from various parties.
Blockchain advocates are convinced the technology will eventually take roots in global logistics, but even they are pragmatic about the pace of adoption and the structural hurdles that may be difficult to overcome.

Eric Johnson from IHS Markit is on the mark when he says, the structural hurdles can be summarized with three key questions:

Who is developing the blockchain solution?

Can individual solutions build enough critical mass to take advantage of blockchain technology?

To what degree can industry parties agree on standards to make multiple solutions interoperable and easy for parties to use?

The interoperability question will be the key to unlock the blockchain kingdom. Multiple solutions are being developed in parallel (we have seen multiple announcements of proof of concepts and pilot deployments this year); so providing shippers, forwarders, suppliers, and other relevant parties a simple way to interact with all systems is imperative for blockchain to succeed in shipping industry.

Fragmented Solutions in the making

Maersk and IBM created a blockchain joint venture earlier this year to support global trade. In March 2018, Accenture, shipping line APL, freight forwarder Kuehne and Nagel, beverage manufacturer InBev, and a European customs organization tested a blockchain solution to streamline the bill of lading process.

A few months later, CargoSmart, a shipment management software provider, announced it had developed its own shipping documentation blockchain solution with Oracle. In addition to these projects, a few other blockchain startups such as Hong Kong-based 300Cubits, Denmark-based Blockshipping, and Slovenia-based CargoX, have set out to transform core shipping processes such as booking, container tracking, and bill of lading creation.

Nearly every software provider of any significance is experimenting with the technology, testing whether there is a commercially viable application to pursue.

The Future Ahead

As individual private blockchains emerge, there are serious concerns about the quantity and neutrality of these solutions. While the liner carriers are concerned about using competitors’ system that can have access to their data, shippers have a different concern. Will they have the knowhow, bandwidth, and willingness to participate in multiple blockchains?

Interoperability is the key word here. Defining how that interoperability works will be very important for both - the liner carriers and the shippers. Interoperability in any industry is generally achieved by the development of standards. But standards are hard and time-consuming to develop (Ask the telecom industry about time and energy they spent in achieving interoperability). Therefore, an alternate and more realistic path forward for blockchain interoperability is another set of software companies normalizing protocols across the various blockchain solutions. In tech jargon, it’s called an abstraction layer. This provides an opportunity for a middleware to emerge that allows a shipper to connect to one system and gain access to whichever blockchain protocol it needs to.

Looking into the future, it’s likely that blockchain will become a fundamental building block of technology used by all stakeholders of shipping value chain, but shipping industry’s adoption of blockchain will be a slow process, considering major challenges ahead: organization resistance to change, stakeholders’ concerns about data privacy, cost of technology, and the time it will take to build a network of stakeholder in the ecosystem.

Sam is the Chief Product Officer at Alpha Ori Technologies (AOT). Alpha Ori is a B2B Technology company operating in IoT (Internet of Things), Ship ERP (Enterprise Resource Planning) and Big Data Science. For any comments reach out to sam@alphaori.sg